Monday, October 28, 2019

Auto insurance carriers will continue to lose to Geico and Progressive until they deal with Point of Sale fraud.

A strange thing happened to the US auto insurance industry last year: two carriers - Geico and Progressive – gained market share while the rest of the industry lost it. Which has got to be frustrating for the rest of the industry because carriers haven't been standing still. Indeed, they've been making major investments in areas such as:

New Core Systems.  Carriers have spent billions on 'digital transformation', using automation to accelerate the speed and reduce the cost of serving insurance customers. 

New Channels and Markets.  Opening direct digital distribution channels and expanding into new segments and geographies to widen their sales reach.

Increased Marketing Spend. Fighting for greater share by ramping up advertising and online lead generation spending.

Yet frequently, these efforts have delivered nothing but unexpected losses. As a result, many carriers have put their market and channel expansion plans on hold or at least slowed them down. After all, it makes no sense to win more money losing business. Which perhaps explains why two companies won more than half of all new business last year.

What is going on?

Carriers are struggling to master the changing customer mix.  Responding to the emerging millennial cohort and other hard to serve segments (high risk, low income) the industry has made it far easier for customers to shop and transact for insurance online. Unfortunately, customers are using this flexibility to engage in quote manipulation and submit claims for pre-existing damage in far greater volumes than more traditional customers and channels do.

Carriers have automated away many useful informal controls. At the same time customers have become more aggressive, carriers have been busily automating and bypassing much of the human interaction in their process - interactions and associated delays that historically served to somewhat deter petty fraud. This is because the dishonest like anonymity and immediate results. Lying to a screen to get an instant result is much less stressful than lying to an agent.

Using third party data to replace personal interaction and controls hasn't worked.  In an earlier piece we pointed out that solely using purchased or other data to weed out fraud doesn't and indeed can't work because false positives are often more common than the fraud condition the data is seeking to identify.  The result, is that false positives overwhelm the number of true data discrepancies, driving perfectly good customers away. 

The result is that many carriers appear to be stuck, uncertain how to profitably serve what before long will be the largest part of the market. They've made investments in new capabilities that don't appear to work with the new, tech savvy Millennial customer as their Baby Boomer customer base erodes. Some analysts have even argued that they should give up competing with Geico and Progressive. We disagree.

Because we've learned how to screen out the extra fraud that comes with selling to these new customer segments, dramatically lowering direct to consumer channel loss ratios. It turns out you can make money selling online to tough customers but only if you use advanced technologies and techniques to marshal all available information in real time at the point of sale.

Carriers must stay the course...but build in robust fraud prevention.
Carriers shouldn’t give up but they need to focus more resources on effective real time analytic and intervention tools that identifies, intervenes and eliminates fraud at the point of sale. That's what our idFusion platform does.

We're VeracityID and we give carriers the tools they need to reduce fraud, better select risk and profitably compete for every type of customer and channel they choose.

Sunday, June 16, 2019

Real time POS fraud resolution is the Fracking of the auto insurance industry.

You probably know the oil industry's  "fracking" story:  everyone knew there were huge reserves of oil tightly locked in shale rock. They ignored them because the cost of producing that oil exceeded its value. Until an innovator paired new technology with techniques that radically reduced the unit cost of extraction, inventing "fracking".  The rest is history.

Auto insurance rate manipulation and fraud has a lot in common with tight shale oil. Carriers have long known that there is significant fraud in their books - it has traditionally been estimated at 15 to 20 percent. Obviously, the carrier who could figure out how to eliminate this cost could gain a huge edge. But almost all of this fraud is "small ticket" and until now it hasn't been economical to pursue most of it. But like with fracking, someone has paired advanced technologies with new techniques that radically lower the unit cost of defeating small ticket frauds. 

That company is VeracityID

Tuesday, March 26, 2019


The auto insurance industry is in the middle of a multi-billion dollar bet on ‘digital transformation’ to reduce costs, improve operational performance and - most importantly – dramatically change the customer experience at every stage of the policy lifecycle. Whether it is one leading carrier’s tagline “15 minutes could save you 15% or more on car insurance”, another’s ‘we know a thing or two because we’ve seen a thing or two” (and paid those claims), or the growing number of carriers claiming to pay claims ‘instantly’ from a photograph – the industry is signaling its commitment to instant decisioning at every step.

And this makes sense in an internet-driven world – where connection, speed and personalization are essential elements of every consumer interaction and hence are strategic imperatives for insurance carriers. But that compelling need also means that carriers are increasing their reliance on data to make risk decisions and reducing the influence of human interaction and judgement.

And the results of that tradeoff have been mixed to date, at best. Carriers are making the consumer experience faster, less complex and more transparent. But the financial impact has been less positive. The combined ratio for the industry has been stuck above 100 for several years now, and the poor performance of direct/online business is a major reason for it.

And we think we know why.

First, the industry has implemented and advertised technology that enables much higher policy churn than ever before. At the same time carriers have ‘trained’ customers to shop actively and have made it easy to do so. In the UK, where online insurance shopping has dominated the market for decades, the average policy life is well under a year and the industry hasn’t earned a consistent underwriting profit since the 90’s. US carriers now report the same trend is emerging in their books. High churn means there isn’t time to ‘recover’ origination costs because it eliminates the luxury of ‘seasoning’ that carriers long relied upon and worsens the impact of rate evasion and early claims fraud on carrier profitability.

Second, and perhaps more importantly, the marked shift from a reliance on judgment to data has eliminated a whole host of informal but very real controls that served to limit lying, cheating and fraud. Informal controls such as an agent’s ability to identify when something didn’t ‘look right’ worked. Not perfectly, of course. But simply by being human agents have proven to deliver a powerful social deterrent to dishonesty. It turns out it's easier to lie to a screen than a person.

But the answer isn’t to go back to an agent-driven model. The world has changed. Customers won’t tolerate it. Carriers can’t justify it competitively or financially. Instead, carriers need to figure out how to replicate and enhance the informal but real interactive role agents play in reducing cheating and fraud. But they must do so at the much higher tempo of the digital age.

Carriers must leverage their data-rich infrastructure to trigger a virtual dialog with customers exhibiting suspicious behavior in their digital activity. They must complement their digital transformation efforts with new tools and skills to monitor, intervene and engage with customers to attract truthful and conscientious customers while deterring the efforts of the deceptive. These tools need to identify risks and act – during live transactions – on a range of concerns. For example,
  • Which applicants are ‘wargaming’ quotes and manipulating submissions to get a rate break?
  • Who has a record of cheating carriers – during applications, endorsements or claims processes?
  • Who doesn’t pay their bills? Who keeps coming back for more?
  • Are there ‘ghost broker’ or insurance card schemes occurring?
  • Are insured vehicles likely to be used for commercial purposes? Do they have pre-existing damage?
  • Which applicants are associated with known or suspected bad actors?
Armed with these and many other data ‘tells’, carriers can engage in very pointed online ‘conversations’ using automated intervention tools to resolve most risks and escalate only the most difficult issues to decision makers. When they do this, carriers will discover that asking bad actors about their questionable behavior will cause them to flee, while the ‘honest’ applicant will appreciate the effort and continue. In effect, carriers will send a ‘digital signal’ that they are paying attention. The result: the innovator gets the honest, conscientious, profitable customers. And the competition gets the dregs.

Thursday, February 21, 2019

Show customers you are paying attention to them – and watch fraudsters run away

Direct insurance - whether by phone or over the internet - is fundamentally different from traditional neighborhood agency business on many dimensions. The most obvious and important one is that there isn’t a trained agent looking the customer in the eye, asking the right questions, and placing the applicant with a company whose risk appetite is a good match. The truth is a local agent adds a lot of ‘hidden’ value because it is harder to cheat someone who knows you, and a good agent can often screen out trouble before it starts by inspecting the assets and assessing the persons involved before a risk is accepted. Capturing that value from an agent is very expensive - and that cost explains the rush to online insurance - but it prevents many types of fraud.

Today’s growing book of direct insurance has a very different character and carries much higher risk. These transactions are a fast, inexpensive and easy way for consumers and carriers to interact.  Indeed, many carriers promote their online sales process as faster than the next guy while saving consumers ‘hundreds of dollars a year in premiums’. But this business model relies on (often flawed) purchased or volunteered information, requires instant integration of complex data to make risk decisions, and, worst of all, it is anonymous.  

Fraudsters rely on that anonymity to defraud carriers of 5-10% of NPW – or more – in new business. Whether it is small-ticket cheaters who lie on quotes to get cheaper rates, serial grifters who play the online game just to get insurance cards for themselves or others, or organized criminal rings setting up staged accidents and body shop frauds – all rely on the anonymity of the online transaction to hide in plain sight. 

The simple truth is that fraudsters don’t think you’re watching or able to stop them.  And the fact is they are probably right. Do you actively monitor your quotes for signs of manipulation? How do you know the condition of the assets you insure? Can you tell when they’re playing you with bogus or inconsistent information across time, other quotes or prior policies?  Has the applicant or his associates defrauded you before? And can you do anything about any of it in the 7½ minutes during which you promised to close a policy? 

For most carriers, the answers are no, no, no, no and no.

And so the fraudsters win. Because they are smart. They find the weaknesses in your systems to get rate, coverage and claims benefits they don’t deserve. And they will do it again and again because you’re an easy mark when you don’t watch and cannot act.  Until you find them after the 3rd or 4th time they’ve ripped you off – in which case they often just ‘disappear’ - or you stop writing business in that neighborhood because it’s not worth the trouble.  So you eat the losses, say you’ve ‘learned’ a lot from the experience, and pull back.

But you can stop whole classes of fraud if you show them that you can see what they’re doing. If you signal that you are paying attention. f you take appropriate action during live transactions.  Behavioral science experts say people generally won’t cheat if they know that they’re being watched.  VeracityID’s experience is that fraudsters conclude you know what they’re doing if you employ the right set of tools at point of sale, during endorsements and before claims are paid. So they go elsewhere to ply their trade, and with them whole classes of fraud simply disappear.   

VeracityID has the tools to make this happen for auto carriers. Let us show you how you can quickly transform your underperforming online or direct business with a short demonstration or a pilot. Let’s stop fraud in your business, together.

Wednesday, January 30, 2019

Why do auto Insurers experience so much rate manipulation at point of sale?

The auto insurance industry has a large problem with customer rate manipulation at the point of sale. Industry studies and our own work with carriers indicate that this type of fraud constitutes upwards of 10% of net premiums. Yet by and large carriers don't focus much resource on fighting up-front fraud. I think it's in part because historically they have been too pessimistic about achieving results. Specifically in the past they've assumed:

"There's not enough time" - The modern auto insurance quotation and purchase process is designed to be completed in a matter of minutes, therefore there is no time for the carrier to examine the customer's data and investigate questionable details. If they try, the customer will go someplace else.

"There's no ROI" - The dollar value of each instance of point of sale fraud is small, running from £50 ($85 Canadian) to about £1,500 ($2,500 C) per policy. It costs more in underwriter investigation time than the potential savings.

"There's too much uncertainty"  - Carriers use third party data to test the validity of various key rating factors like territory, drivers, vehicles and so on but this data is only 80-90% accurate. Carriers don't want to reject good business based upon bad data so they're reluctant to 'pull the trigger' even when the data tells them they should.

But these assumptions are rapidly becoming obsolete and are leading carriers to ignore a significant profit and pricing opportunity.

"There's not enough time" is no longer true because new tools are available that automate the identification and measurement of fraud risks within a quote session's short duration. 

"There's no ROI" is becoming obsolete because these same tools are increasingly able tyo automate the process of challenging data claims and collecting documentary proof at POS, eliminating almost all of the burden historically borne by Underwriting.

Finally,  "There's too much uncertainty" is only true because carriers mistakenly focus on the data rather than the customer. The data is simply a 'tip and lead' that indicates that there might be a problem. Only the customer can tell the carrier whether the tip is true. And they usually do because once a manipulator thinks a carrier has found him out, he typically abandons the quote and goes elsewhere. Customers who aren't trying to manipulate - the 'false positives' - won't run away just because the carrier asks them a question. This means carriers don't need perfect data - the combination of "good enough" data and new rapid customer interaction tools provide far more insight.

The bottom line is that if carriers update their assumptions about the feasibility of fighting POS fraud they'll find a large and very accessible profit and pricing opportunity. How do I know? Because we're already doing it for their competitors.

VeracityID stops fraud before it starts. Our solutions detect, deter and defeat the most frequent and costly auto insurance frauds, during quote, billing, endorsement and at claim.

Friday, January 18, 2019

Things every insurer needs to know about auto insurance fraud

The auto insurance market suffers from a shockingly high level of fraudulent activity, yet we find many people in the industry don't realize just how significant the problem is. This is a brief guide to auto insurance fraud. The framework we used is adapted from Daniel Ariely's consumer fraud framework to reflect the unique nature of auto insurance fraud. We highly recommend his book: The (Honest) Truth About Dishonesty. It's a great primer on how to think in a structured way about customers and fraud.

Things every insurer needs to know about auto insurance fraud:

Industry analysts estimate that auto insurance fraud constitutes a staggering 15 to 20 percent of total automotive net premiums written each year. We believe it's even higher for on line policies sold directly.

There are four basic kinds of fraudsters:
  1. Fibbers: People who manipulate their rating data  up front to get a lower premium.
  2. Freeloaders: Customers who stop paying premiums as soon as their get an insurance card.
  3. Fabricators are customers who file claims for preexisting damage or pad claims with extra damage or faked health issues.
  4. Fraudsters are professionals who organize complex, high dollar frauds typically involving multiple people around a 'staged' accident.
  5. Retreads are simply any of the four kinds of fraudsters who having discovered how easy it is to cheat a given carrier do so over and over again.

Fraud happens when something changes. There are four key events that customers can exploit to commit fraud. It is essential to closely monitor and control these events to screen out frauds.
  • During quote and application 
  • At an endorsement when the policy details change
  • At a billing event
  • At a claim event
Underwriting fraud costs carriers as much as claims fraud. This is because while the average cost per event is much lower, there are far more events, making it much more difficult to target.

If given the chance, a large proportion of 'normal' customers will commit fraud but only a 'little' fraud - costing between a few hundred and a few thousand dollars - and only once in a while.  Fraud experts hypothesize that doing only a 'little' fraud allows them to think of themselves as still 'honest' people while capturing the fruits of dishonesty.

All things being equal, customers will commit more fraud if they believe no one is watching them. Thus they will commit more fraud on line than through a call center, they will commit more fraud in a call center than when working through an agent. The more specific, focused interaction the carrier can have with the customer, the less that customer will attempt to cheat.

Customers will commit more fraud if the dishonesty is about something other than money. This is why so many customers are comfortable manipulating underwriting data. It's playing with 'data', not 'stealing money' even though the result is the same.

Customers will commit more fraud if they can justify it as an "acceptable norm".  Customers will commit more fraud if their peer group does it or if the behavior is considered acceptable in similar product contexts. For example in health insurance carriers are required to honor claims arising from 'preexisting' conditions while in auto this is not the norm. This difference makes it easier for customers to justify cheating because the industry is being 'unfair'.
The huge number of 'normal' customers committing small frauds are very difficult to manage, leading carriers to focus their efforts on fighting the big professional types of Fraud. Carriers view these smaller ticket opportunistic frauds as simply a 'cost of doing business, to be factored into their rates. But as digital transformation of the industry proceeds, carriers are realizing that there is a major opportunity to gain a significant pricing and profitability edge in the market by targeting this fraud.

VeracityID stops fraud before it starts. Our solutions detect, deter and defeat the most frequent and costly auto insurance frauds, during quote, billing, endorsement and at claim.

Saturday, September 22, 2018

Auto Insurance customers are changing - which means trouble for carriers

"We're not making money on direct, online business" is something we hear from a number of carriers. Some of them are fairly new entrants but there have been reports that top direct marketers are also struggling in their core channel.

The excuses given for this are usally 'too much new competition' or 'the 'good' direct customers are already taken, all that are left are the bad ones'. We would like to propose another theory to explain why it's become so hard to make money selling Auto Insurance directly:  the customers are changing. And changing in two specific ways: they are becoming much better internet users and their understanding of what insurance is has changed.

Increasing internet sophistication is driving more manipulation.
The smart phone revolution has given most Americans an hour or more a day of experience using the internet to solve problems. This is leading to more and more customers engaging in 'wargaming'. Wargaming is our term for when a customer goes to a carrier's site, gets a valid quote, then requests a second quote after changing a piece of information - say the territory or dropping a driver. By doing this a couple times, consumers can get a good feel for how an insurer calculates their premium, resulting in more and more well informed data manipulation. We see it happening all the time. And it is costly,

Healthcare Reform (aka "Obamacare") is changing the way that customers understand 'insurance' Customers' concept of  'insurance' also appears to be changing. The traditional understanding of casualty insurance whether it be health, auto or home was that the policy only covered events that happened during the policy life. Preexisting conditions (healthcare) and damage (P&C) were  understood to be excluded from coverage. But with advent of Obamacare the health insurance market has done away with the concept of preexisting conditions. Instead, health insurance covers any health need during the life of the policy. Consumers may now be comparing their health insurance policy to their  P&C policy with its preexisting damage exclusions and asking 'why doesn't my auto insurance cover this?'

Another aspect of Obamacare may be driving consumers to think differently about insurance. Obamacare limited the difference in  health premiums between the sick/old and healthy/young to three times the healthy/young premium. Consumers compare that to  auto insurance's much greater rate disparities and conclude that they're 'unfair'.

Many customers' concept of what is 'fair' is changing in ways that hurt carrier bottom lines. The result may be that many consumers have been persuaded that things that in the past that they would have considered dishonest are in fact the way things ought to be. That filing preexisting damage claims and manipulating data isn't so wrong after all. And with their much better insight into how their premium is calculated, they're in a much better position to do so.

One caution: while the theories we've proposed here are supported anecdotally by the data and interactions that we see in our customer relationships, we do not know of any scholarly study that directly addresses these issues. We're hoping to encourage enterprising academics to take up the challenge of understanding these market changes.

Carriers need to upgrade their fraud identification and resolution capabilities But in the meantime, we are convinced that these factors are driving at least some of the direct auto channel profitability problems and that they they will have more and more impact as time goes by. So it's essential that carriers enhance their abilities to detect, intervene and resolve fraud to counteract this growing problem. And that's what we do.

VeracityID stops fraud before it starts. Our solutions detect, deter and defeat the most frequent and costly auto insurance frauds, during quote, billing, endorsement and at claim.